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Is Environmental Governance Substantive or Symbolic? An Empirical Investigation

Journal of Business Ethics volume 114, pages 107–129 (2013)Cite this article

Abstract

The emergence of environmental governance practices raises a fundamental question as to whether they are substantive or symbolic. Toward that end, we analyze the relationship between a firm’s environmental governance and its environmental management as reflected in its ultimate outcome, environmental performance. We posit that substantive practices would bring changes in organizations, most notably in terms of improved environmental performance, whereas symbolic practices would portray organizations as environmentally committed without making meaningful changes to their operations. Focusing on a sample of environmentally sensitive firms, results are consistent with environmental governance mechanisms being predominantly part of a symbolic approach to manage stakeholder perceptions on environmental management, having little substantial impact on organizations. Statistical analyses show mostly that there is no relation between environmental governance mechanisms and environmental performance, measured in terms of regulatory compliance, pollution prevention, and environmental capital expenditures. However, there is some indication that environmental incentives are associated with pollution prevention. Interviews with corporate directors shed further light on these results by underlining that environmental governance mechanisms are employed at the board level to protect the organization from reputational and/or regulatory harm, but are not necessarily intended to proactively improve environmental performance.

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Notes

  1. For example, both Alcoa and DuPont had former World Wildlife Fund executives on their boards in 2009 (Alcoa proxy statement, March 16, 2009; DuPont proxy statement, March 20, 2009).

  2. The Social Investment Forum (2010) reports that more than 10 % of assets under management in the United States (close to $3 trillion out of $25 trillion) are now invested under SRI criteria.

  3. The monitoring function induces directors to protect shareholders’ (stakeholders’) interests by monitoring managers’ behavior. The advice function implies that board members shape and evaluate strategic decisions that will help facilitate access to the resources necessary for corporate success (Fama and Jensen 1983; Johnson et al. 1996; Zahra and Pearce 1989).

  4. Environmental strategy is defined as an action plan “intended to manage the interface between business and the natural environment” (Sharma 2000, p. 682). The environmental literature depicts the environmental strategy construct as a continuum with a reactive strategy at one end, and a proactive strategy at the other (Aragón-Correa 1998). The objective of a firm with a reactive strategy is compliance with legal requirements, while a firm pursuing a proactive strategy aims for environmentally sustainable development (Hart 1995).

  5. Environmental responsibility and good governance are significant elements of corporate reputation (Bebbington et al. 2008).

  6. The generalizability of our results is limited to firms with characteristics similar to those of our sample firms.

  7. In order to avoid noise caused by changes in governance policies following the introduction of the U.S. Sarbanes–Oxley Act (SOX), data was collected for post-SOX years, 2003–2008.

  8. KLD conducts a detailed assessment of corporate social, environmental, and governance performance each year for almost 3,000 companies (KLD 2009). Environmental criteria examined in this assessment are listed in Appendix 1.

  9. In some sense, this dichotomy in environmental performance parallels the distinction being drawn between mandatory and voluntary environmental disclosure (Berthelot et al. 2003).

  10. The existence of an audit committee, financial expertise on the board and financial incentives in executive compensation were all shown to impact financial outcomes (e.g. see Bushman and Smith 2001; Goh 2009; Vafeas 2005).

  11. These pieces of legislation cover energy, air, water, and chemical issues. A detailed list of the environmental regulations encompassed by the database is provided in Appendix 2.

  12. The average ECE of $150.1 million is similar to the 2005 average ECE of $167.8 million reported by Cho and Patten (2008). These authors also reported that, on average, ECEs in their 2005 sample made up 0.57 % of the assets. ECEs in our sample roughly correspond to 0.49 % of assets ($150.1 million/$30,752 million), in line with these previous findings.

  13. Since lagged ECEs intensity is a determinant of environmental regulatory performance in model 1 and lagged measures of environmental performance are determinants of ECEs in model 3, endogeneity may be a concern. However, results from a Hausman test do not suggest the presence of endogeneity between ECEs intensity and environmental regulatory performance (see “Sensitivity analyses” for details).

  14. These results are in line with prior literature showing that greater cash flows are typical of corporations deciding to improve their environmental performance (Clarkson et al. 2011).

  15. We also conducted logistic regression tests for each separate year and found a large increase in the model’s explanatory power when ECE and other economic variables are added. Hence, this appears to confirm the interpretation of our findings.

  16. We also conducted logistic regression tests for each separate year and found a large increase in the model’s explanatory power when ECE and other economic variables are added. Hence, this appears to confirm the interpretation of our findings.

  17. As indicated in Tables 3, 4, and 5, the sample size for models 1 and 2 is n = 180 while n = 219 for model 3. This is due to the fact that we lose at least one year’s observations in models 1 and 2 because they use lagged independent variables.

  18. These results contrast with prior findings showing that economic performance is a driver of environmental performance and disclosure (Cormier and Magnan 2003; Al-Tuwaijri et al. 2004; Clarkson et al. 2011). This contrast might be explained by the specific nature of ECE in comparison to the broad scope of environmental performance or disclosure.

  19. Interviews provide a deeper understanding of complex realities such as environmental governance (Miles and Huberman 1994). They also also allow for partial corroboration and triangulation of our above findings through qualitatively informed explanations (Modell 2005). In addition, they highlight the relationship between environmental governance, environmental performance, and ECEs from the perspective of those who have been directly exposed to these issues (Patton 2002).

  20. Ashforth and Gibbs (1990) suggest that legitimacy management practices often exist in a gray area between substantive and symbolic.

Abbreviations

CEO:

Chief Executive Officer

CEPD:

Corporate Environmental Performance Database

ECE:

Environmental capital expenditure

GLS:

Generalized least squares

OLS:

Ordinary least squares

PPE:

Property, plants, and equipment

R&D:

Research and development

RCRA:

Resource Conservation and Recovery Act

ROA:

Return on assets

SEC:

U.S. Securities and Exchange Commission

SIC:

Standard Industrial Classification

SOX:

U.S. Sarbanes–Oxley Act

SRI:

Socially Responsible Investing

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Acknowledgments

We would like to thank Emilio Boulianne, Nola Buhr, Denis Cormier, Giovanna Michelon, Den Patten, and participants in parallel sessions of the 2012 Annual Meeting of the American Accounting Association, the 34th Congrès de l’Association Francophone de Comptabilité, the 33rd European Accounting Association Annual Congress in Istanbul, the 21st International Congress on Social and Environmental Accounting Research in Saint Andrews, the 2010 and 2011 North American Congress on Social and Environmental Accounting Research (CSEAR Summer Schools in North America) in Orlando and Montreal for their comments and suggestions on previous versions of the paper. Financial support from the Social Sciences and Humanities Research Council of Canada, the Ordre des Comptables Agréés du Québec, the Lawrence Bloomberg Chair in Accountancy (Concordia University), the RBC Professorship in Responsible Organizations (Concordia University), and the École de comptabilité and the Faculté des Sciences de l’Administration of Université Laval is gratefully acknowledged. Also special thanks to our informants who generously donated their time for this study.

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Authors and Affiliations

  1. École de comptabilité, Faculté des Sciences de l’Administration, Université Laval, Pavillon Palasis-Prince, 2325 rue de la Terrasse, Quebec, QC, G1V 0A6, Canada

    Michelle Rodrigue

  2. Lawrence Bloomberg Chair in Accountancy, John Molson School of Business, Concordia University, 1455, de Maisonneuve Blvd. West, Montreal, QC, H3G 1M8, Canada

    Michel Magnan

  3. ESSEC Business School, Avenue Bernard Hirsch, BP 50105, 95021, Cergy Pontoise Cedex, France

    Charles H. Cho

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  1. Michelle Rodrigue
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  2. Michel Magnan
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  3. Charles H. Cho
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Correspondence to Charles H. Cho.

Appendices

Appendices

Appendix 1: KLD Environmental Rating Criteria

Strengths

  • Beneficial Products & Services

  • Pollution Prevention

  • Recycling

  • Alternative Fuels

  • Communications

  • Environment Management Systems

  • Other Strengths

Concerns

  • Hazardous Waste

  • Regulatory Problems

  • Ozone Depleting Chemicals

  • Substantial Emissions

  • Agricultural Chemicals

  • Climate Change

  • Other Concerns

Appendix 2: Regulation Acts Covered by the Corporate Environmental Performance Database (CEPD)

  • Atomic Energy Act

  • Clean Air Act

  • Clean Water Act

  • Endangered Species Act

  • Insecticide, Fungicide and Rodenticide Act

  • Mining Safety and Health Act

  • Safe Drinking Water Act

  • Toxic Substances Control Act

The CEPD also provides information on the Resource Conservation and Recovery Act (RCRA). This information was left out of the variables environmental violations and environmental fines following the recommendations of the database builders. Indeed, the RiskMetrics Group mentions that:

[The RCRA] programs requires a company to assess, and if necessary clean up, contamination at active industrial sites as a condition of retaining its RCRA permit to treat, store or dispose of hazardous waste […]. Because it largely represents an obligation to clean up sites that were contaminated at some past date when waste disposal standards were less restrictive, however, waste cleanup responsibility should not be interpreted as evidence that a company violated any environmental law or that current management is not addressing environmental issues in a responsible manner. (RMG 2001, p. 12)

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Rodrigue, M., Magnan, M. & Cho, C.H. Is Environmental Governance Substantive or Symbolic? An Empirical Investigation. J Bus Ethics 114, 107–129 (2013). https://doi.org/10.1007/s10551-012-1331-5

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Keywords

  • Environmental performance
  • Environmental regulation
  • Governance
  • Substantive management
  • Symbolic management